As readers know, comprehensive tax reform legislation was introduced on November 2, 2017, and is currently working through Congress. The House version (available here) was passed on November 16th and the Senate version (available here) was passed on December 2nd. Both versions generally align on most executive compensation-related provisions, but the shape of any final legislation remains uncertain as the House and Senate will attempt to reconcile their differences over the next few weeks. Following is a brief recap of the important points related to executive compensation.
House and Senate; what is the same?
- Amend 162(m). The exceptions for performance-based compensation (including stock options) and commissions would be repealed. In addition, the list of covered employees would be expanded to include the CFO, and an employee who is covered in one year remains covered so long as the employee receives compensation from the company (including after termination of employment). The scope of the rule is also expanded to include certain companies with registered debt securities or that do not have securities listed on an exchange but have a large number of equity holders.
- Enact 83(i). Certain employees of private companies would be allowed to elect to defer the taxation of stock received upon exercise of stock options and settlement of RSUs for up to five years if certain conditions are met.
- Enact 4960. Tax-exempt organizations would be subject to a new 20% excise tax on compensation over $1 million and excessive severance paid to their five highest-paid employees.
- Retain 409A. The House and Senate deleted the rule that would have significantly altered the tax treatment for non-qualified deferred compensation.
House and Senate; what is different?
The Senate bill (but not the House bill) contains a 162(m) grandfather, so compensation would not be subject to the new rules if it is paid under a written binding contract that was in effect on November 2, 2017 and not materially modified thereafter. The House version eliminates the performance-based compensation exemption for taxable years beginning after 2017, without exception.
Samantha Nussbaum has consulted on behalf of public and private companies, compensation committees, and senior management on all aspects of executive compensation. Samantha’s consulting and legal background includes advising on executive compensation in the context of mergers and acquisitions, spin-offs, and initial public offerings; executive employment, severance, and change in control agreements; equity incentive plans; deferred compensation; and securities laws, including reporting and disclosure implications.
Bindu M. Culas
Bindu Culas has over 15 years of experience advising clients on the US and international legal, tax and regulatory aspects of designing and structuring equity incentive programs, employment agreement, and severance and change-of control plans. Bindu has worked with both domestic and foreign publicly traded and privately held companies as well as pre-IPO companies.